“What is good for America is good for GM”

The title of this piece is the actual quote from Charlie Wilson, the CEO of General Motors, testifying before the Senate in 1955. The second half was “…and what is good for GM is good for America.” The second half of the statement became immortal, and the first was forgotten. Policy makers seem to have adopted only the second half, as well.

A friend just emailed me a reminder of the Clinton-era program called Partnership for a New Generation of Vehicles, or PNGV. Under PNGV, the government plowed money and research resources into a joint effort with the big three automakers to develop a marketable sedan that could get 80 miles per gallon. Several years and hundreds of millions of dollars later, GM, Ford, and Chrysler had each developed 5-passenger prototype hybrids that achieved 70-80 mpg. They presented their new concept cars at the 2000 Detroit Auto Show, and then quietly abandoned them. Their public reasoning was that nobody wanted a high mileage sedan. Their public cover was that they were going to develop an even better, higher-tech line of hydrogen powered vehicles through the FreedomCAR program, with no fixed deadline. In the meantime they continued to fight increases in gas mileage standards.

Toyota and Honda took the concept seriously, and in order to compete with this soon-to-be imaginary line of American-made hypercars, developed the 60 mpg Honda Insight and the 45 mpg Toyota Prius. The rest of the automotive ass-kicking is history.

Why did Detroit keep on producing Stupid Useless Vehicles the size of armored personnel carriers? Simple short term economics. The material cost of a Ford Escalade, the size of a cottage and weighing three tons, was not that much more than that of a compact car, at least in comparison to the sale price. The cost of steel is generally less than $1500. The cost of the sales and marketing effort is the same and the healthcare and pension costs are the same. The cost of making a weld or driving a bolt into a huge car is about the same as performing the operation on a small one, and it is those labor costs that rule. The difference comes in the value proposition to the consumer. Use some extra steel to enclose more space and the buyer is willing to pay $30,000 to $50,000 for a box on wheels to get down to the grocery store. The automakers were netting $10,000 per unit for these behemoths. Let the future take care of itself, because they were minting money.

Then the supply and demand curves on the oil production graph got close enough to kiss, and the price per barrel quintupled in a few years. I’m sure that at some point the automakers noticed that even as they were discounting their urban assault vehicles to try to move them that there was a three to six month waiting list for Priuses. They had the technology in their pockets to make cars that could surpass the Prius and the Honda Civic Hybrid, but in their pockets the technology stayed. Perhaps their executives thought that if everybody in the audience clapped and believed in fairies, then newly discovered oil would fountain out of the ground and people would flock back to those highly profitable wheeled dirigibles.

Another friend just saw an ad by GM that said, “In a time of global financial crisis, supporting a loan to the U.S. auto industry is in America’s best interest.” What is good for GM is good for America. My friend commented, “GM's moved from commercials about rugged trucks bouncing around the landscape with pretty girls driving them to ads begging to be saved.”

Should they be saved, and if so, how? If not, what should we do instead?

We should look at this in terms of long term investment and geological inevitabilities. Even the Pollyannas at the International Energy Agency are presenting numbers that, if one reads them carefully, predict that world oil production will peak below 90 million barrels per day, compared to a production rate of 87 mbpd right now. They are predicting a decline in oil production on the order of 5% a year after 2015, if we don’t plow hundreds of billions into oil exploration and development. Which we won’t.

We won’t because of the short planning horizon of investors and corporate executives and the sawtooth oil price swings we are starting to experience. The price goes up, induces a recession and a collapse of demand, and the price of oil plunges. The economy slowly recovers, demand goes up as supply shrinks, and the price surges again. Repeat, with increasing price and decreasing supply. The problem is that the volatility discourages long term investment in expensive oil development projects. The new deep offshore fields and unconventional heavy tar-like crudes require prices in the $70-$90 range to break even. Oil development bankers won’t invest if they don’t know that they will get that price.

So this means that we’ll need more Priuses, right? As a stopgap, yes, but long term, even medium term, the ubiquitous personal automobile is doomed. It’s not about personal preference, virtue, or public policy – it’s just geology. We’ll need widespread public transport, different zoning, and the localization of our lifestyles in general.

What this means for the Detroit automakers is that we could pour endless money into their accounts and in the long run they would go under. We should follow the old military adage, “Don’t reinforce failure.” It would be an absolute waste of our (borrowed) money to patch up GM so it could totter along for a few more years making unsellable SUVs and pickup trucks. In the short run, it would be cheaper for the taxpayer to let GM go bankrupt, beef up unemployment benefits for its workers, and invest in post-peak industrial development.

The restructuring of GM would have to involve more than administrative adjustments. If we really want it to thrive, it would have to refocus its production on vehicles for a post peak oil world. We need streetcars to replace the streetcar lines that GM bought up and burned over half a century ago. We need passenger railcars and high efficiency electric rail engines. We need high efficiency buses and passenger vans for flexible public transit. And yes, in the short term, high mileage sedans like the GM Precept and electric cars like the criminally abandoned and crushed GM EV-1. We don’t need an industrial dinosaur, managed by dinosaurs, gorging on our resources as it staggers towards extinction.